Cointegration, Fractional Cointegration, and Exchange Rate Dynamics

ABSTRACT

Multivariate tests due to Johansen (1988, 1991) as implemented by Baillie and Bollerslev (1989a) and Diebold, Gardeazabal,
and Yilmaz (1994) reveal mixed evidence on whether a group of exchange rates are cointegrated. Further analysis of the deviations
from the cointegrating relationship suggests that it possesses long memory and may possibly be well described as a fractionally
integrated process. Hence, the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons.